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Hub Q&A: What is the tax impact of Covid-19 on investors?

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By Darren Coleman and Elena Hanson

Special to the Financial Independence Hub

The following Q&A is between the Financial Independence Hub and the two hosts of the new Two-Way Traffic podcast, financial advisor Darren Coleman and cross-border tax expert Elena Hanson.

Their bios are at the end of this blog. 

 

FINANCIAL INDEPENDENCE HUB:

While April 30th is usually Canada’s tax filing deadline, this has been extended this year because of the Covid-19 crisis. Our first question is whether there are other tax impacts for investors because of the Coronavirus?

DARREN COLEMAN: The stock market sell-off was broadly based and the decline  indiscriminate as both good and bad quality investments dropped about the same amount. When this happens, investors should upgrade the quality of their portfolios by moving into better quality securities. In some cases, this may mean triggering a capital loss you can carry backwards to reduce capital gains paid in the past (up to three tax years) or “bank” those losses to offset future capital gains. It’s a good idea now to review your investment portfolio and financial plan with a qualified Certified Financial Planner and investment professional. Business owners should also be tracking their losses, if they have any, as a result of closures or reduced operations.

ELENA HANSON: Most types of returns and payments have been extended, but Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) operations have been curtailed and are operating at minimum capacity. This inconveniences practitioners and taxpayers as we are in tax season and continue doing business.

Both the Canadian and US governments have also introduced new, large legislative packages to address the current economic reality, stabilize the economy, and prevent a recession. US provisions have been enacted in three phases and we await phase four. The Canadian government has been modifying its economic response plan daily and only a small portion has been enacted. This requires us to stay on top of the situation, communicate with our clients in a timely manner, and advise them on their inquiries.

Are there Tax strategies we should be putting in place in lieu of Coronavirus? 

DARREN COLEMAN: First, you should harvest capital losses in investment portfolios. And second, consider moving from investments that earn interest – rates are at historic lows – to those that pay dividends. Not only will you generate a higher income, you will pay a lower rate of tax on dividends over interest.

ELENA HANSON: It depends. Are you a business owner, and if so, are you US-based or Canadian-based? Are you an employee or are you a Canadian resident or a Canadian resident who is also a US citizen? Right now, it’s about injecting cash into the hands of the business or individuals. The US CARES Act is robust and offers real economic stimulus in the form of large loans. A portion of this is forgivable with eligibility to carry losses back as far as 2013, and you can accelerate depreciation on certain capital assets, which in the past, did not have preferential treatment. The Act also provides non-taxable rebates to individuals and access to their pensions on a tax-deferred or loan basis.

On the other hand, Canadian benefits are all taxable, whether it’s the Canada Emergency Response Benefit (CERB), the 10% employment subsidy of the Temporary Wage Subsidy (TWS), or the 75% subsidy of the Canada Emergency Wage Subsidy (CEWS). This means  individuals and employers who receive these benefits will be taxed on them next year. They will also be taxed on the US benefits on the Canadian return (if they are subject to Canadian taxation) but not on the US return.

As for other strategies, consider filing early if you expect a refund. With the significant loss in marketable securities, it may be a good time to make a gift, replace assets in trusts, do estate freezing or refreezing. In addition, it’s wise to carryback losses to prior years, and on the US side you can now carryback corporate losses for both 2019 and 2018 taxation years for up to five years back. But watch out for scammers and fraudsters during the rebate season.

What are the best short-term things we should be doing?

DARREN COLEMAN: The first priority of every financial plan is to have cash, or immediate access to cash, so you can fund up to three months of expenses. That primary rule is being tested right now for many individuals, professionals and businesses. If you don’t have sufficient cash, you may need to adjust your holdings to free some up.

ELENA HANSON: The immediate need of our clients is to assist them with any tax benefits available from the stimulus packages, especially if they were laid off or terminated. For businesses, owner-managers want to better understand how they can preserve cash to maintain their operations. They want to know which of the newly introduced laws are best suited for their business – Economic Injury Disaster Loan (EID) or Paycheck Protection Program Loan (PPP) on the US side, or which of the two wage subsidies on the Canadian side. We’ve also been dealing with some loss tax planning, including bad debt, related to business operations or individual marketable securities for individuals.

What are the best long-term things we should be doing?

DARREN COLEMAN: The global equity markets had a historic decline in February and March. This has impacted the investment and retirement portfolios of millions of investors. What does this mean for your financial plan? It’s time to review that. For some, it may mean you need to keep working longer. For others, it may be a rare opportunity to improve your portfolios by buying great long-term securities that are on sale.

ELENA HANSON: If you’re a business owner it’s a great time to review and optimize your business strategy, revisit your supply chain, and look at disaster-response measures. This will better prepare you for the next time you face a challenging economic environment. Also, we will likely end up living in a different reality after the pandemic, so start thinking now about how to ensure your business can be more competitive and innovative.

If you’re an individual who is seeing a large portion of your portfolio disappear, perhaps it’s time to have an honest conversation with your money manager, update your risk tolerance in your portfolio, and do estate planning. As people reflect more on their mortality, you should also schedule a meeting with your lawyer (once businesses are open) to draft or update your will. We all want to hope for the best, but need to plan for the worst and this experience proves it.

What is the overall impact of Covid-19 on the market and on your investments?

DARREN COLEMAN: Most diversified portfolios are down between 15-25% in 2020. This has likely concerned most investors and has certainly changed their financial plans. It has also tested the risk tolerance of many, especially after a ten-year bull market. Continue Reading…

How to maintain Mental Health and Wellbeing during the COVID lockdown

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By Michael Jacobs

Special to the Financial Independence Hub

Amid the COVID-19 pandemic, many countries, states, and cities across the globe have been recommending self-isolation. Many states in the U.S. have recommended that people shelter in place and only go out for necessities. However, lack of social interaction and fresh air and sunlight can have a negative effect on anyone’s mental health and wellbeing.

Separation from family, friends, and colleagues can often trigger feelings of anxiety, anger, restlessness, stress, and depression. However, when you are on lockdown and cannot seek out the obvious remedy, what can you do? Prioritizing self-care while in self-isolation is crucial to coming out of this time happy and adjusted and ready to face renewed social interaction.

Here are a few ways to cope with the anxiety and depression that can accompany being isolated:

Keep busy

Keeping to a regular schedule, including a regular wake up time and bedtime, can help you battle the emotions that creep up when you’re unable to make connections. Another thing that can really help you is to keep busy. Get to work on that household project you’ve been putting off. Learn a new language or begin a new hobby through tutorials on YouTube. Consider broadening your education by taking free courses offered online.

Hang out with your pets

If you have a pet, now is an ideal time to reinforce those bonds. Petting your furry companion releases dopamine and serotonin and both chemicals help to reduce stress and stabilize mood. Taking them for walks, for a playdate in the park, or look into how to teach them new tricks online. Spending time with a companion animal is an ideal way to take care of your mental wellbeing.

Limit News and Social Media

Images of the number of coronavirus cases, empty grocery store shelves, and companies laying off workers can cause just about anyone stress. While you do need to stay informed, you might want to stop watching the news 24/7 and might want to limit your time on social media. Being reminded constantly of the pandemic can cause stress, anxiety, and depression. If you have a friend constantly posting about the pandemic, consider muting them or unfollowing them for the time being.

Read

Watching television or browsing YouTube for cute cat videos can seem like an escape, but reading can stimulate your imagination. It can also give your brain a reprieve from reality. Reading for just six minutes can lower blood pressure and ease muscle tension. Even listening to an audiobook can help relieve anxiety. If your local bookstore isn’t open, many libraries have apps and you can also download books to your iPhone or Android through the Kindle app.

Try CBD Oil

There are several studies that show that CBD oil can help ease anxiety. In a double-blind study conducted in Japan in 2019, 37 teenagers were given either 300mg of CBD oil or a placebo daily for four weeks. The CBD-oil recipients noticed a similar decrease in symptoms to that of Paroxetine, a drug commonly used to treat social anxiety disorder.

Another study conducted in Colorado sampled 47 patients who had concerns about anxiety. Most of the patients were given 25mg of CBD in addition to treatment. After the first monthly assessment, 79.2% of patients reported improvement. After two months, 78.1% reported continued improvement. CBD oil can be used as a tincture or taken in capsules. For immediate relief, however, consider a CBD oil in one of your favorite vaporizers.

Be mindful

If you see self-isolation or shelter in place orders as more of a punishment, it may help to practice mindfulness. Focus on the fact that by staying at home, you are not exposing yourself or any of your loved ones to the virus. You are also helping to flatten the curve, so that hopefully, the virus can stop being spread and we can all get back to normal that much faster. Focus on the fact that you are doing the right thing. Continue Reading…

New book helps financial advisors sustain and build their practices

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By Dwarka Lakhan

Special to the Financial Independence Hub

The book, Winning Ways: Real World Strategies to Help You Reimagine Your Practice, is a comprehensive resource for financial advisors seeking to build and sustain their practices.

One of its reviewers, Fidel Hinds, former Managing Director with the Royal Bank of Canada, suggests advisors “can spend a lifetime learning what (they) can find in this book.”

Unlike countless books on practice management which typically promote the views and insights of a single author whose biases are often drawn from their own knowledge and experience, Winning Ways shares the strategies and tactics of over one hundred on-the-ground practitioners who are either engaged in running their own practice or provide professional services to advisors.  These individuals live and breathe practice management as part of their daily routine and are best qualified to tell advisors “what works and what doesn’t” – simply because they have first-hand experience.

Reimagining practices

The book provides different – often conflicting – perspectives and approaches on building and running a practice. It seeks to help advisors understand what other advisors do to build their practice, with the objective that they will find nuggets of advice they can use to reimagine their own practice. Continue Reading…

A philosophy to help investors cope in this uncertain time

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Katie Moum: Unsplash

By David Miller, CFP, RFP

Special to the Financial Independence Hub

If you are feeling uneasy about your financial situation and your investment portfolio, you are not alone.

Our lives have changed. Right now, most of us are working from our home offices, suddenly teaching Algebra and Social Studies to our kids, and watching more Netflix than we should. Healthy behaviours have hopefully changed for the better, with extra hand washing and social distancing. Shaking hands may be a thing of the past.

The economy, for the most part, is shut down, so does that mean your investment behaviours should change too?

That depends …

  • What kind of Plan have you committed to?

If you have an investment plan that looks to take advantage of the low prices during a downturn and if you have stuck with it during this unprecedented time, kudos to you! The panic selling during March 2020 dropped the S&P 500 (the ‘top’ 500 listed companies in the US) by 36%! Scary stuff that made a lot of people feel stressed out, and it feels like it could get worse. But let us check that feeling with historical facts.

March 3rd, 2009 was the technical bottom of the 2008/09 Financial Crisis, but no one recognized it until much, much later. Here is a quote from CNNMoney.com from that day 11 years ago; note the language:

“I think people are at a loss for answers right now,” said Larry Glazer, managing director at Mayflower Advisors. “Investors are mentally exhausted, and the market at multiyear lows has a psychological impact.”

He said it’s possible that the declines are part of a cycle the market needs to go through to get to healthier footing, but that, regardless of that, it’s very painful for investors in the near term.

“This is a risky market and investors need to ask themselves if the stocks they own are ones they want to own through an extended downturn,” said Robert Loest, portfolio manager at Integrity Funds. “If not, they should be raising cash.”*1

This language seems similar to the sentiment around today’s markets. Today is a much different situation but much of the same fear-based feelings are predicated in the media every day. I’m not saying that we’ve already seen the market bottom of this unprecedented event, but if you had followed the advice of the Portfolio Manager above and picked March 3rd, 2009 to sell your investments and raise cash, you just lost out on the best possible day to invest for the next 11 years. Just as no one could have predicted March 23rd, 2020 would be the day the markets would rebound for 20+ days after, even amid worsening Pandemic numbers and an evolving oil crisis.

Table 1: S&P 500 (CAD Hedged) vs. Canadian Short-Term Bonds

The point is, no one knows where the market will go in the short-term. A lot of the market movement is based on fear and greed, not grounded economic reality and fundamentals. Holding a long-term view and a strategy to buy into these short-term panics is vital to investment success.

As an investment firm, we took a cautious approach that last week of March, dipping our toes into the water, selling only some of the short-term bonds that we hold and buying into the down markets. We did not buy exactly at the bottom, but we were close, buying near a 30% discount from February’s highs. If the equity markets drop down again, we will sell more of the safe assets and buy equity again.

What allows us to buy near the bottom during a panic? For each of our clients, we build a holistic strategy that includes a written commitment in the form of an Investment Policy Statement.

“Writing down your goals means that you can visually see them. This is an important point because when we see something, it affects how we act.”*2

  • The Investment Policy Statement

Simply defined, an Investment Policy Statement (IPS) is our guide to how we invest your money. It lays out, in writing, your long-term goals, risk tolerance, methods to invest, expected long-term rates of return, downside risks, and corresponding asset allocation targets. Continue Reading…

Is Venture Capitalism right for your Business?

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By Daniel Bailey

For the Financial Independence Hub

Launching a startup is a daunting challenge. Not only do you need to have an innovative idea for a product or service, but you need to secure funding to support the company until it begins to turn a profit. There are many options for funding and you may try to obtain a bank loan, angel investor or venture capitalist to help your business thrive. In many cases, a venture capitalist will be the most beneficial as you can receive managerial and technical advice in addition to financial assistance. Venture capital is not the right solution for every startup, however, so make sure you can answer these five questions to determine if it is the best option for your business.

Do you have a Prototype or Business Model ready?

It is not enough to simply have an idea for a great new product if you want to attract investors. You need to have a prototype to showcase during your pitches for financial assistance. Not only just you have a working prototype, but it needs to be refined so investors can see that you have already assessed it and accounted for minor problems in the design. Your final prototype will likely look much different than the initial one, so it is crucial to have performed the necessary construction and made changes before approaching potential investors. If you do not have a prototype or a solid business model in place, your company is not ready for the growth a venture capitalist usually brings.

Is it the right time to seek an investor?

Seeking an investor out immediately after you have an idea for a new business is a mistake. If you want your company to be successful, you must perform a few critical steps before searching for an investor, especially if you intend to seek out a venture capitalist. Venture capitalists such as Mark Stevens, the managing partner of S-Cubed Capital, look for startups with limited revenue and potential for explosive growth. You should work to get your company’s name out to customers so you can build a solid customer base and establish a solid projection for future profits so you can meet these criteria and attract investors.

Are you willing to share equity in your company?

Unlike traditional bank loans or angel investors that simply offer financial backing, venture capitalists often take a stake in the company’s equity in exchange for their expertise. T Continue Reading…